The Treasury Inspector General for Tax Administration found that while the IRS successfully implemented four new individual tax deductions created by the Working Families Tax Cut Act, the agency failed to adequately control and process the deductions.
The Working Families Tax Cut Act, also known as the One Big Beautiful Bill Act, established deductions for qualified tips, overtime compensation, passenger vehicle loan interest, and senior deductions. The law was enacted shortly before the 2026 Filing Season, giving the IRS limited time to issue guidance, update tax forms, and implement processing and compliance controls.
The inspector general found that the IRS's initial guidance for the Overtime Deduction did not adequately explain exemptions under the Fair Labor Standards Act, increasing the risk that taxpayers would incorrectly determine their eligibility. The IRS later issued more helpful guidance and in August 2026 further clarified which employee categories are generally exempt from overtime requirements.
The audit identified significant weaknesses in controls for the Car Loan Interest Deduction. As a result, the IRS accepted more than 470,000 electronically filed tax returns for Tax Year 2025 claiming $977 million in questionable deductions, with an estimated tax effect of $122 million.
The IRS uses business rules to reject electronically filed tax returns that do not meet required criteria, but did not timely implement a business rule for certain returns because of concerns about the legal implications of rejecting otherwise valid returns. Additionally, as of August 2026, the IRS had not established a post-processing compliance strategy to identify and address potentially improper claims.